What is an Accounting Estimate?

An accounting estimate is an approximation of the amount of a business transaction for which there is no precise means of measurement. Estimates are used in accrual basis accounting to make the financial statements more complete, usually to anticipate events that have not yet occurred, but which are considered to be probable. These estimates may be subsequently revised as more information becomes available. Changes in accounting estimates impact the current period and future periods, but have no impact on prior periods.

The amount of an accounting estimate is based on historical evidence and the judgment of the accountant. The basis upon which an accounting estimate is made should be fully documented, in case it is audited at a later date.

Examples of Accounting Estimates

Examples of accounting estimates are a loss provision for an environmental damage claim, a loss provision for a bad debt, and a loss provision for warranty claims. A seller of tangible goods might also create a loss provision for obsolete inventory. Or, a business that is subject to a lawsuit may create a provision for lawsuit losses, based on its best estimate of what the lawsuit settlement amount may be.